It will be some time before we can sort out the impact of last week’s developments in the US automobile industry. April sales figures continued sinking with sales dropping back to an annualized rate of 9.3 million, down from 14.5 million in April 2008.

The week’s major development came when some of the hedge funds holding Chrysler’s secured debt refused to take a write-down and the company filed for bankruptcy. There is optimism that the company can be out of bankruptcy and into the hands of the UAW (55%), Fiat (20%), and US and Canadian governments (10%) in 30 to 60 days. The next month will bring the answers to many questions such as whether consumers will continue to buy cars from a bankrupt company in sufficient quantity; can the financing of Chrysler vehicles through GMAC work; and whether the bankruptcy proceedings can be completed in 30 to 60 days or drag on interminably. The bankruptcy judge received 150 motions to consider at the first hearing. Important issues regarding the restructuring and sale to Fiat have not yet been raised.

Chrysler’s bankruptcy is being looked upon as a trial run for a possible GM bankruptcy that could occur as early as the end of this month. GM has already announced that it will temporarily close 13 plants this summer in order to reduce inventory. When the parts manufacturers and reductions in the numbers of Chrysler and GM dealerships are taken into consideration, the layoffs will run into the tens and possibly hundreds of thousands, even under the best of conditions.

Should the restructuring/bankruptcies go awry or sales of US-made cars continue to drop, the damage will be felt in every corner of the economy. Job losses could easily run into the hundreds of thousands and major parts of the automotive industry would be liquidated. Layoffs of this scale obviously would have a considerable impact on the demand for consumer and producer goods.

Under these circumstances, the demand for oil would likely drop further, putting more pressure on prices. While the myriad interactions here are too complex to forecast with any confidence, the fortunes of the US automobile industry over the next few months may determine the course of the recession and the demand for oil.